Question

Please complete the statements. An ideal economic situation for a central bank would be one of rates of unemployment, suggesting that output is high, coupled with rates of inflation, giving central banks more leeway to help mitigate recessions. However, due to real shocks which increase input prices, central banks must sometimes choose between low rates of growth, resulting in rates of unemployment, or equally unwanted rates of inflation. If the Federal Reserve increases the money supply too much, might become too high, prompting the Federal Reserve to contract the money supply and potentially send the economy into

Answer 1

Low

Low

High

High

Inflation

Recession

Every economy aims at getting low unemployment rate and low rate of inflation. However due to shocks and otner unforeseen events like wars, natural calamities, the input prices may rise unexpectedly. This may force the central bank to accept low Economic Growth which may result in high Unemployment and high inflation. If the money supply is increased too much then this will raise the purchasing power and aggregate demand of consumers and business organisations. This has a negative side and may result into inflation also. As a result Federal Bank has to tighten the money supply and control the Aggregate Demand by raising the interest rates which may result into recession.